Youch. Regrets, Ms. Siberry. Seems like we have a lousy track record with pop singers—anybody remember when Levitt announced that Thomas Dolby was releasing a new record, an announcement that turned out to be 100 percent wrong?
I guess we should give up pop singers and stick to crack dealers, real-estate agents, and poker cheats.
How Much Tax Are Athletes Willing to Pay?
(SJD)
The Laffer curve is a unicorn-y concept that seeks to explain the rate of taxation at which revenues will fall because earners either move away or decide to earn less (or cheat more, I guess).
If I were a tax scholar interested in this concept, I would be taking a good, hard look at the current behavior of top-tier professional athletes. Boxing is particularly interesting because it allows a participant to choose where he performs. If you are a pro golfer or tennis player, you might be inclined to skip a particular event because of a tax situation, but you generally need to play where the event is happening. A top-ranked boxer, meanwhile, can fight where he gets the best deal.
Which is why it’s interesting to read that Manny Pacquiao will probably never fight in New York—primarily, says promoter Bob Arum, because of the taxes he’d have to pay. From the Wall Street Journal:
Manny Pacquiao has won fights in California, Tennessee, Texas and Nevada, not to mention Japan and his native Philippines. But with Pacquiao in New York this week to promote his next fight—a November bout in Macau against Brandon Rios—Pacquiao’s team said Barclays Center and the Garden were two venues where he wouldn’t fight because he would have to pay the state’s tax rate in addition to federal taxes. “He’d have to be a lunatic,” said Bob Arum, Pacquiao’s promoter.
In an L.A. Times article, Arum says that Pacquiao may never fight anywhere in the U.S. again:
“By fighting outside the country, as he’s doing in this Rios fight, Manny doesn’t have to pay U.S. taxes anymore—at a rate of 40% for a foreign athlete.
“If this pay-per-view and other things take off like we think they may, I can’t imagine Pacquiao will ever again fight in the U.S.”
There are of course other factors at play besides taxes—gambling, for one, which is a big reason that Macau has become such a boxing center. But whatever you think of the Laffer curve, it’s hard to ignore the variance in tax rates around the world, especially for athletes who might earn a lot of money in a short time.
In January, the golfer Phil Mickelson said he was “going to have to make some drastic changes” to deal with federal and California tax hikes (he lives in California). “If you add up all the Federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” he said.
His accounting was challenged and Mickelson, one of the most popular golfers ever, was widely spanked for publicly airing his tax dissent. So last month, when he won back-to-back tournaments in Scotland (the Scottish Open and the Open Championship), he kept quiet. But the media did the speaking for him. In Forbes, Kurt Badenhausen wrote a (very good) article about Mickelson’s British tax tab, estimating that he’d pay, in total, about 61 percent tax on his nearly $2.2 million in earnings. And Badenhausen identifies this interesting wrinkle:
But that’s not all. The U.K. will tax a portion of his endorsement income for the two weeks he was in Scotland. It will also tax any bonuses he receives for winning these tournaments as well as a portion of the ranking bonuses he will receive at the end of the year, all at 45% . . .
The U.K. is one of few countries that collects taxes on endorsement income for non-resident athletes that compete in Britain (the U.S. also does). The rule has kept track star Usain Bolt from competing in Great Britain since 2009, outside of the 2012 Summer Olympics when the tax was suspended as a condition for hosting the Games. Spain’s Rafael Nadal has also allowed U.K. tax policy to dictate his tennis playing schedule.
And let’s not forget that the greatest endurance athlete of our era, Mick Jagger, fled the U.K. years ago because of tax considerations (and, also, the police there kept arresting him and his mates).
Pricing Chicken Wings
(SDL)
The other day, I stopped by a local fried chicken joint, Harold’s Chicken Shack. Just to give you a sense of what sort of restaurant this is, there is a layer of bulletproof glass separating the workers and the customers. They don’t cook the chicken until you order, so I had five or ten minutes to kill waiting for my food.
One of the items on the menu is a chicken-wing dinner. With each dinner, you get a fixed amount of french fries and coleslaw.
The two-wing meal costs $3.03. The three-wing meal costs $4.50.
Since the only difference between the two meals is one extra wing, with that third wing costing the customer $1.47. I thought this was interesting, because if each of the first two wings were priced at $1.47 each, then the implied price of the french fries and coleslaw is a combined 9 cents. So it seems like Harold’s is implicitly charging more for the third wing than for the first two wings, which is unusual since firms generally give quantity discounts.
I read further down the menu:
two-wing meal $3.03
three-wing meal $4.50
four-wing meal $5.40
five-wing meal $5.95
The four- and five-wing meal prices are more in line with how firms usually price.
So what do you think Harold’s charges for a six-wing meal? Here’s the answer:
six-wing meal $7.00
Definitely most bizarre. When economists see things that don’t make any sense, we can’t help but think of some story that rationalizes the seemingly odd behavior. Maybe Harold’s prices the six-wing meal high because it is worried about obesity? Not likely, since every item on the menu is fried. Is the sixth wing especially big or tasty? Is demand by people who order six wings more inelastic?
Perhaps some clues could be found in the pricing of other items. Fried perch are sold in a similar fashion to fried chicken, again with french fries and coleslaw. Here is how perch is priced:
2-piece perch meal: $3.58
3-piece perch meal: $4.69
4-piece perch meal: $6.45
So you get that third piece of perch cheap, but they nail you on the fourth piece. This certainly hints at Harold’s thinking there is some logic to this sort of pricing.
Ultimately, though, my guess is that the person who chose these prices was just confused. One thing I have realized as I have worked more with businesses is that they are far from the idealized profit-maximizing automatons of economic theory. Confusion is endemic to firms. After all, firms are made up of people, and if people are confused most of the time by economics, why wouldn’t that carry over to firms?
Why Are Kiwifruits So Cheap?
(SJD)
I’ve been eating a lot of kiwifruits lately. (You may also know them as the Chinese gooseberry.) At the corner deli near my home on the West Side of Manhattan, I can buy three for a dollar. They are delicious. Unless the stickers are lying, they come from New Zealand. At thirty-three cents apiece, a New Zealand kiwifruit costs less than the price of mailing a letter to the East Side of Manhattan. (And believe me, I consider a first-class stamp one of the greatest bargains ever.) How on earth can it cost so little to grow, pick, pack, and ship a piece of fruit across the world?
To make fruit matters more complicated, I can buy one banana (also imported) and one kiwifruit for about the same price as one apple, which may well have been grown as near as upstate New York. So I wrote to Will Masters, a food economist at Tufts University’s Friedman School of Nutrition.
Most economists, as I’m sure you know, reply to such queries in verse, and Will is no exception:
Damn supply and damn demand:
Why cheap hogs and costly ham?
Bargain wheat, expensive flour,
The oldest villain’s market power.
Just one seller makes us nervous,
Like that U.S. Postal Service:
They may offer bargain prices,
But who disciplines their vices?
Middlemen have long been blamed
For every market that’s inflamed,
Yet better explanations come
From many a Hyde Park alum.
Modern views from Chicago-Booth
Give a nuanced view of truth,
Steven Levitt and John List
Made each of us a freakonomist.
We let data speak its mind
No matter what Friedman opined
And find the price of fruit and veg
To be driven by the market’s edge.
Like the tail that wags the dog,
Marginal thinking clears the fog:
Sellers, buyers, traders too,
Interact and prices ensue.
A kiwi costs 33 cents
Simply because no one prevents
Another farm or New York store
From entering and selling more.
In contrast apples may be dear,
For reasons that will soon be clear:
Picking them’s below our station,
To lower costs we need migration.
Bananas have a different story,
Seedless magic, breeder’s glory,
Cheap to harvest and to ship,
Who cares if workers get paid zip?
Each crop’s method of production,
Where it grows and how it’s trucked in,
Satisfies some needs quite cheaply
While other costs will rise more steeply.
A buyer’s choices matter too,
For nonsense stuff like posh shampoo,
Prices are not down to earth,
The more you pay the more it’s worth.
Behavior is as behavior does,
Maybe some things are “just because,”
Much of life’s a mystery,
A habit due to history.
For prices, though, it’s competition
Plus tariffs set by politicians,
That determines whether we see
Such delightfully cheap kiwi.
Bravo.
Pete Rose Provides a Lesson in Basic Economics
(SDL)
Some time ago, Pete Rose signed a bunch of baseballs with the inscription “I’m sorry I bet on baseball.” According to media reports, he gave these balls to friends and never intended them to be sold for profit.
But the estate of someone who received some of these balls decided to put thirty of them up for auction. There was speculation that they would sell for perhaps many thousands of dollars.
That is when Rose himself stepped in and delivered one of the fundamental lessons in economics: as long as close substitutes are available, prices won’t get very high.
When Rose heard that these balls were being auctioned, he offered to sell balls with the same inscription for just $299 on his own website, effectively destroying the market for the auction-bound balls. True, the newly signed balls wouldn’t be perfect substitutes, because a collector could still say he had one of the original thirty. For that reason, you wouldn’t expect the auction price of the old balls to fall all the way to $299. Indeed, the auction was called off and the balls were sold for $1,000 apiece.
(Hat tip to John List, the only baseball-memorabilia-salesman-turned-economist I know.)
If Only God Had Had Corporate Sponsorship . . .
(SJD)
. . . in the book of Genesis, when the world is created. Can you imagine how rich He could have gotten by selling the naming rights of every animal, mineral, and vegetable?
If God was unlucky to toil in the days before corporate sponsorship, the Chicago White Sox are not so unlucky. They have just announced that for the next three seasons, their evening home games will begin at 7:11 P.M. instead of the customary 7:05 P.M. or 7:35 P.M. Why? Because 7-Eleven, the convenience store chain, is paying them $500,000 to do so.
I’ve lately noticed advertisements showing up in a lot of unlikely venues: stamped onto fresh eggs and printed on airplane barf bags, for instance. But I have to admit there is something particularly creative about affixing a value to time itself, especially if you can capture that value for your own benefit.
Maybe I will write more about that tomorrow™.
What Captain Sullenberger Meant to Say (But Was Too Polite to Do So)
(BY “CAPTAIN STEVE”)
Captain Steve is a seasoned international pilot for a major U.S. carrier and a friend of Freakonomics. (Given the sensitivity of what he writes, he prefers anonymity.) This post was published on June 24, 2009, six months after the “The Miracle on the Hudson,” in which Captain Chesley Sullenberger safely landed an Airbus A320-200 in the Hudson River. Both the plane’s engines had failed, due to a bird strike, shortly after takeoff from LaGuardia Airport in New York.
After reading some of the excerpts of Captain Sullenberger’s various speeches, especially those of a few weeks ago with the National Transportation Safety Board, I would like to add my editorial.
Captain Sullenberger has been a class act all the way. He’s not been petty, pious, or egotistical. He is, however, like most of the captains I know and, more broadly, most of the pilots I know. Why? He doesn’t need to be otherwise. When someone has accomplished what he and the scores of men and women like him have accomplished, why do we need to boast?
He implies that what he did while serving as the “skipper” of US Airways flight 1549 was simply his job. He is being as honest and accurate as he can be: “Please, no fanfare, no applause, just doing my job.” But what he has also alluded to in some of his speeches is that it has taken years, even decades, to prepare himself for that one single “lifetime event” of guiding his jet into the safe, smooth landing on the Hudson River.
What he is not saying is this:
We, the airline pilots, are facing a losing battle in the PR department. You believe that we make huge salaries and are treated like royalty. Pure fiction. Why have we been losing this battle for such a long time? Simple. Because most of us are like “Sully”; we don’t want applause or fanfare for doing what we are trained to do. However, we do realize that we should be fairly compensated for what we have achieved to get this job and what we continue to do on a daily basis to keep it. This backlash of pilot-bashing is building to a boiling point.
Regional carriers, like the Colgan Airlines flight in Buffalo [which crashed, killing all forty-nine aboard], employ the lowest-bidder pilots. No offense to them; this is not personal. It is the system that is at fault. Money and profits at all cost.
Airline history lesson 101: it used to be, up until the mid 1980s, that a young pilot would be hired on at a major carrier, become a flight engineer (FE), and then spend a few years managing the systems of the older-generation airplanes. But he or she was learning all the while. These new “pilots” sat in the FE seat and did their job, all the while observing the “pilots” doing the flying, day in and day out.
The FEs learned from the seasoned pilots about the real world of flying into the O’Hares and LaGuardias. They learned decision making, delegation, and the reality of “captain’s final authority” as confirmed in the law. When they got the chance to upgrade, they became a copilot. The copilot’s duty was to assist the captain in flying; but even during their time as the new copilot, they had the luxury of the FE looking over their shoulders—i.e., more learning. This three-man-crew concept, now a fond memory in the domestic markets but used predominately in international flying, was considered one more layer of protection.
But it’s gone. Now domestic flying is being shifted to the regional carriers, like Colgan, American Eagle, Comair, and Mesa, to name a few. These consist of the lowest bidders and the newest pilots flying into the harshest of environments. The airline management teams would say that it works and that this is routine flying. I beg to differ.
Analogy: you are told you need a quadruple bypass. Now you search the Internet for the cheapest price you can get, and you rus
h to schedule the operation because there are only two dates that you can get that cheap rate.
Do any of us do that? No. What do we do? We get second opinions, we ask who is the best in town, etc. We ask: “Is there anyone who has been doing this surgery for the last twenty to twenty-five years?” We don’t say, “Let me use someone who just graduated from medical school and was rushed through residency because it will be cheaper.”
Why not apply the same logic that the public uses to buy an airplane ticket to this surgery scenario? Bypass surgery is routine, right? Some surgeons do two, three, or four a day. It must be easy.
To take that a step further, how many surgeons have to retake their medical boards every nine months in order to be qualified? Airline pilots do. We are subject to simulator check-rides every nine months to demonstrate knowledge, proficiency, and ability.
How many surgeons have to take a physical exam every six months by the AMA in order to work? None! Airline pilots do. Fail your medical exam and you’re done! How many surgeons (or any other critical professional, including politicians) are subject to random drug and alcohol testing? None.
Flying across the North Atlantic is routine, right? It wasn’t just a short few decades ago. We, the pilots, make it routine because we have skills, experience, and training like very few others.
Gifted? No, not many of us are. But dedicated and focused upon excellence, you bet! I have told my kids one thing many times since they were little children: “I don’t expect perfection, I expect excellence.” I expect 100 percent effort in all you do. This is the creed of every pilot I know.
Flying from Chicago’s O’Hare to Denver is routine, right? We, the pilots, make it so. But is your life worth less over the heartland of America rather than over the Atlantic? It certainly is if you are on the low-cost regional carrier. If you are on such a plane headed to Denver and the engine is on fire, I am sure it is comforting to know that you saved 15 percent by scouring the Internet for the cheapest fare. Isn’t it great to know that you have the newest, least-experienced, exhausted, starving young cockpit crew that this regional airline could find?
When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants Page 6